Unnamed Persons Requirement May Be Used To Obtain Names of Potential Tax Cheats

The Canadian Minister of National Revenue (“Minister”) may, under subsection 231.2(3) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) and subsection 289(3) of the Excise Tax Act, R.S.C. 1985, c. E-15, seek information from third parties in order to look for tax cheats. The request by the Minister is known as an “Unnamed Persons Requirement” or “UPR”. An UPR is filed by the Minister (the Attorney General of Canada on behalf of the Minister) with the Federal Court of Canada to seek an order for a person (a third party) to disclose specified information relating to an unnamed person or unnamed persons.

The Federal Court of Appeal unanimously upheld a UPR in Roofmart Ontario Inc. v. Minister of National Revenue, 2020 FCA 85. In this case, the Minister filed an application with the Federal Court of Canada for a UPR and included a supporting affidavit from the CRA official responsible for addressing the issue. The application was brought against Roofmart Ontario Inc. and targeted the following unnamed persons:

Roofmart customers whose total annual purchase and/or billed amount was $20,000 or greater (for the period from January 1, 2015 to December 31, 2017); and

Roofmart customers whose total annual purchase and/or billed amount was $10,000 or greater (for the period from January 1, 2018 to June 30, 2018).

The Minister sought the following information related to the group of persons described above:

a) The Customers’ legal name, business or operating name, contact person, business address, postal code, and all telephone numbers on file;

b) The Customers’ business number, if known;

c) The Customers’ itemized transaction details including invoice date, invoice number, total sale amount, method of payment, and address of delivery; and

d) All bank account information for the Customers (including transit, institution, and account numbers) from credit applications and/or otherwise maintained by Roofmart in its records.

It is important to note that Roofmart itself was not under tax audit at the time the Minister made the application. There was no suggestion that Roofmart had done anything wrong. Roofmart opposed the application for a UPR to protect the privacy of its customers.

According to the legislative provisions, the Federal Court of Appeal may grant the UPR if the court is satisfied by information on oath that:

(a) the person or group is ascertainable; and

(b) the requirement is made to verify compliance by the person or persons in the group with any duty or obligation under this Act.

The Federal Court of Canada held that the statutory preconditions were satisfied in this case. The judge concluded that the persons targeted by the application were ascertainable. In his view, the total annual purchase requirement was sufficient to establish the target group of residential and commercial contractors and their identities. The judge was also satisfied, on the evidence, that the Minister sought the information to verify the unnamed persons’ compliance with the Income Tax Act. Since the Excise Tax Act provision is similar to the Income Tax Act provision, the same result could have occurred in the Minister has sought the UPR under the Excise Tax Act.

The Federal Court of Appeal upheld the Federal Court of Canada decision and rejected almost all of the arguments made by the appellant. The Federal Court of Appeal remarked that there are only two statutory preconditions to the issuance of a UPR. In this case, the two preconditions were satisfied. There used to be other preconditions, but Parliament amended the legislation and removed other preconditions thereby giving more powers to the CRA. In 1996, Parliament repealed paragraphs 231.2(3)(c) and (d) of the Income Tax Act, doing away with two preconditions: that there be reasonable grounds to believe the subject of a UPR had not complied with the Act; and that the information or documents requested were not otherwise more readily available.

As a result, of this decision, it is clear that the Minister can ask the Federal Court of Canada to issue a UPR against a third party (such as Roofmart) and require that party to undertake a review of their records and provide information about their customers (contractors who meet the identified criteria). The information can be used to identify tax cheats and commence audits. Companies have few arguments that the court will accept to stop the issuance of the UPR.

If you have received a notice of an application for a UPR, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.